Buy This Small Cap NBFC Stock For 24% Upside, Stock Grew 45.92% In 3 Months, Says ICICI Securities

ICICI Securities has a buy call on the stock of Spandana Sphoorty Financial Limited for gains up 24% from its current level with a target price of Rs 750 per share. This is a small-cap NBFC having a market cap of Rs 4,320.69 crore.

Q2FY23 was a quarter of consolidation for Spandana Sphoorty (Spandana) with focus on: 1) building foundation to ensure sustainable growth in the coming years, 2) containing forward flow in the PAR portfolio, 3) rebuilding the liability engine, and 4) strengthening the management team. Progression towards achieving these milestones are on track. Further, management sounded confident about the company's full-year FY23 disbursement target of Rs80bn despite a muted H1FY23 (when only Rs27bn was disbursed).

Stock Outlook & Returns

The stock's current market price (CMP) on NSE is Rs 609 per share, 0.49% up from its previous close. Today it opened at Rs 606.05 per share. The stock recently touched its 52-week high level at Rs 653.95 recorded in September 2022. Its 52-week low level is Rs 286.65, recorded in December 2021.The stock surged 7.63% in the past 1 week, however, it fell 4.44% in the 1 month. It has given 45.92% in the past 3 months. Over a year, it has given 11.7% positive return. In the past 3 years, it has given 43.92% negative return on investments. Since its listing on the stock exchange, it has given a 28.11% negative return. It was listed on NSE In August 2019.

Trend reversal quarter

Spandana reported net earnings of Rs 552mn in Q2FY23 vs loss of Rs 2bn in Q1FY23 largely driven by retracement in NII (up 34% QoQ), lower opex (down 2% QoQ) and credit cost decline to 2% vs an average of >10% during past 6 quarters. AUM growth reviving to 5% QoQ, after declining for 4 consecutive quarters, and >300bps QoQ improvement in NIM to 13% drove NII growth. NIM, even after adjusting for interest reversal of Rs0.4bn in Q1FY23, expanded 60bps QoQ. As a result, RoA improved to 3.8% with a healthy PPoP of 5.2% during Q2FY23.

AUM growth guidance for FY23 intact; incremental growth would be largely driven by acquisition of new customers

Total AUM grew 5% QoQ, after declining for 4 consecutive quarters. Notably, incremental growth was equally driven by customer acquisition (net customer base grew 2% QoQ) and average ticket-size (up 3% QoQ). With improved visibility on portfolio quality, collections and funding lines, the company started investing for growth (added 300 loan officers in Q2FY23 and is planning to add another 750-1,000 in H2FY23). Hence, the management maintains its full-year FY23 disbursement target of Rs80bn despite a muted H1FY23 (when Rs27bn was disbursed).

Credit cost to moderate in coming quarters, but will still remain elevated in FY23E. NIMs could surprise positively

While credit cost is likely to subside going forward and normalise at 50bps on a quarterly basis by Q4FY23E, full-year FY23E credit cost is likely to remain elevated. We are building-in 6.8% credit cost in FY23E and 2.8% in FY24E. However, we also expect margins to expand given: a) steady decline in marginal cost of borrowing to 12.6% in Q2FY23 vs 14% in Q4FY22 and recent upgrades by rating agencies, and b) >300bps increase in lending rates during the past 3 months.

Management and operational stability to help improve earnings trajectory going forward

Spandana has taken the opportunity to beef up its top- and mid management teams, post the resignation of its erstwhile MD in Nov'21. It has hired CEO, CFO and CTO in the past six months. Management stability along with realigned business processes would help it execute its Vision 2025 programme in an effective manner. The key aims of Vision 2025 are: improving RoA to >4.5% (2.8% in FY22) and RoE to >20% (6.9% in FY22) by Mar'25.

Buy for a target price of Rs 750 per share

The brokerage said, "Given operational stability, gradual recovery in earnings led by credit cost normalisation and improved visibility on achieving >4% RoA by FY24E, we maintain BUY on the stock with a revised target price of Rs 750 (earlier: Rs 500). We now assign a higher P/BV multiple of 1.5x (vs 1x earlier) on Sep'23E BVPS."

According to the brokerage firm, the key risks are Stress unfolding higher than anticipated, and operational instability caused by external interference.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.